The FINANCIAL -- Fitch ratings has on April 22 downgraded Japan-based Panasonic Corporation's (Panasonic) Issuer Default Ratings (IDR) and Senior Unsecured ratings, and has removed the Rating Watch Negative (RWN) status on the ratings as follows:

Long-term foreign and local currency IDRs downgraded to 'BBB+' from 'A'; Removed from RWN; Outlook Stable;

Short-term foreign and local currency IDRs downgraded to 'F2' from 'F1'; Removed from RWN;

Local currency senior unsecured notes downgraded to 'BBB+' from 'A'; Removed from RWN.

The Outlook of the Long-term IDR is Stable.

This rating action affects the issuer's outstanding JPY500bn unsecured straight bonds scheduled to mature in December 2011 (JPY100bn), March 2012 (JPY100bn), March 2014 (JPY200bn) and March 2019(JPY100bn).

The downgrades reflect the likely deterioration of Panasonic group's consolidated financial profile after its acquisition of a 50.2% in SANYO Electric Co., Ltd. (SANYO) on 21 December 2009, based on the agency's analysis on a pro forma basis (i.e. aggregating the statements of Panasonic and SANYO ). Full-year operating results for SANYO and its subsidiaries will be included in Panasonic's consolidated financial statements for the fiscal year ended 31 March 2011 (FY11).

Fitch notes Panasonic's net leverage measured by adjusted debt net of cash over adjusted funds from operations (FFO-adjusted net leverage), on a pro forma basis, rose to 3.5x for the first nine months of the fiscal year ended 31 March 2010 (9MFY10) from 0.9x for FY09. This reflects an impairment in cash generation relative to an enlarged debt burden, which rose by around JPY800bn. Taking improved results in the last quarter of FY10 into account, the agency estimates the pro forma FFO-adjusted net leverage of Panasonic would be in the range between 1.5x and 2.0x for FY10.

Fitch notes that the acquisition of SANYO is in line with Panasonic's strategy to strengthen its energy system businesses, including solar cells and rechargeable batteries; however, these business segments require a lot of investments to retain their competitiveness in the global market. Panasonic plans to invest JPY100bn between the fiscal years of 2011 to 2016, to increase the production of SANYO 's solar cells.

Furthermore, Panasonic needs to go through a restructuring challenge associated with the overlap between Panasonic and SANYO 's consumer electronics segments, though SANYO 's market position is much weaker. Panasonic may also face some pressures when trying to restore its profit margins to FY08 levels, particularly in light of its bold initiatives to grow in both developed and emerging markets in the coming years.

Fitch will consider further negative rating action should Panasonic's upcoming results reveal a trend of heightening business and financial risks, which could be reflected in a meaningful decline in its product market share due to weakened industry competitiveness. In addition, should the agency expect FFO-adjusted net leverage to be sustained above 2.0x, and/or a negative profit margin before interests and taxes (EBIT margin) due to increased borrowings or deteriorated profitability, it will also lead to further downgrades. Conversely, a positive rating action may result if Fitch expects Panasonic's FFO-adjusted net leverage to fall below 1.0x, EBIT margin rise above 5% and free cash flow to return to positive on a sustained annual basis. Also, if there is evidence of a sustainable pick-up in product pricing and demand, driving an improvement in Panasonic's profitability and credit profile, it will also be positive for its ratings.

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